Boobonomics

Yes, this post is about the Economics of female breasts. It is inspired by are recent Times article on how young females act strategically to extract more and more from publishers as they reveal in successive photo sessions more and more their breasts. Once they have all uncovered, the market price drops markedly for any subsequent session.

What happens here is reminiscent of the ratchet effect of Regulatory Economics: in a principal-agent problem where a regulating principal tries to figure out the cost structure of the regulated agent. Any information that the agent provides is valuable to the principal only when revealed for the first time only, and it is irreversible. Thus agents try to extract some rent from principals in exchange of this information.

Going back to female breasts, it appears from the Times article that the women in question are participating willingly and knowingly in this game. They are in for the money, the glamor or whatever else. The article also relates how they are attracted by stars and seek them from their own will. The article also relates that some others find this "circus" very troubling, that it is degrading women, that this is not what the female emancipation was all about. Thus it should be prohibited.

Let us get back to Economics. Laws or constitutions typically protect you from sexual harassment. This is typically an inalienable right. Now what if you were willing to give this right up against money? You do this knowingly, after weighing the pros and the cons. Why would you not be allowed to sell this right? This is exactly the question that Kaushik Basu has asked. His response is that there are circumstances where this right should not be sold: while a worker may prefer a job with sexual harassment when given the choice, she may prefer even more an environment where sexual harassment is not possible because the wage would only slightly lower, but higher than a wage without sexual harassment (when it is a choice). It is really an argument about how the fact that there is an option reduces the value of the option. Al Roth concurs on an other dimension: some activities are so repugnant to others that they should be banned. I would prefer them to be discouraged, say, by having dwarf tossing events pay a special fee. Or gambling, horse meat, and obscene words. Or prostitutes.

We have now drifted all the way to prostitution: if both parties to a transaction are willing parties, why should this transaction be prohibited? (note the "if"). Is it that because such transactions have adverse impacts elsewhere? I may imagine it could render marriages less stable (or the opposite...), it could project a certain image on other women, etc. But I think we need to think really hard before prohibiting a transaction. In particular, we need to think beyond the projection of our own values onto others. We need to think rather in Coasian terms: if I want to engage in prostitution, then I should compensate those hurt by this in such a way that we find a Pareto improvement: everyone is better off.

How to stick to your New Year's resolutions

Soon is the time to make resolutions, and like most resolutions, they will fall to the wayside within days or at best weeks. Now, how could Economics help you?

StickK.com is run by a group of faculty at Yale University following on a very simple principle: if nothing tangible is at stake, there is little incentive to stick to a resolution. However, if you have committed to some amount of money, then the thread of losing that amount will make you stick. Thus, at StickK.com, you set a price and a deadline for a goal, typically losing weight. If you succeed, and independent auditor verifies your claim and you are home free and happy. If not, you have to pay in your collateral, which will then be forwarded to a charity. If you are wondering, the website hopes to make money from ads, in particular for weight loss (surprise...).

Will this work? It is clear that once money is at stake, anybody is more careful. Just think about all the liability threats and how they restrict actual behavior. There are, however, a few issues with the case at hand:

1. How can such a contract be enforced? This looks like a big hassle StickK.com will face once it has to collect money from people who cannot commit. If they cannot commit to losing weight, aren't they also likely not be able to commit to paying?
   
2. Would courts accept this as a valid contract? Indeed, it seems to be quite one-sided. I am no lawyer, but it looks like StickK.com is not providing a service when it asks for payment, as the person has not lost weight...
3. It is not clear how the auditing could be performed at low cost.
   
4. A payment to charity may not be a sufficient incentive to stick to a resolution. A much better deterrent would be a payment to, say, your mother-in-law, the Mafia or your local property owners association. This would, by the way, also take care of the auditing.

At least this is a start. Let's see how it works out. But, at the time of this writing, the scheme is not yet functional and the busiest time for resolutions is approaching fast. I wonder how the founders have committed to that deadline.

The dead weight loss of Christmas

Sorry to rain in on all your Christmas cheer, but this period just bums me for the waste of resources it brings with it. I am all for people being generous to others and spreading wealth and happiness, but Christmas presents are just the wrong way to do it. Are the gifts you give to others truly the best use of the money the others would have made? Or, seen from the perspective of the gift receiver, would have bought something else with the the value of the gist I just received?

It turns out that the AER published back in 1993 a short article by Joel Waldfogel with the same title as this post. He surveyed Yale undergraduates to estimate how much the mismatching between the gifts and the wishes of the receivers were destroying the value of the gifts. Results: between 10% and 33% are lost. Losses are at the lower end of the interval for gifts from immediate family and friends, and at the upper end for extended family. Waldfogel finds also that cash gifts are more likely when losses are likely to be high, or when there is high variation in recipient valuation.

Waldfogel's results were controversial, first because the sample was drawn from a highly unrepresentative sample of the American population: Yale undergraduates (rich, young, dependent on parents). Also people seem to value a good more when it is received compared to self-bought. This can even result in a welfare gain from Christmas. Subsequent comments (rarely has a short article in the AER generated so much discussion in the AER) highlight that it is very difficult to measure anyway, and that the sequencing of the survey questions matters.

My take on this: I have the feeling that in many cases the original Waldfogel results are accurate. Just think of all the "gift stores" that sell crap you would not buy for yourself, but is good for giving to others. But I can believe that in some situations, the sentimental value of a gift makes up for the value. Think for example about diamonds: while the diamond industry managed to create the illusion they are worth a lot, their resell value is very low. Yet, all those women receiving diamonds are overjoyed, even when they should realize the hole it created in the household budget.

Once you remove the sentimental value of a gift, it is clear that there is a dead weight loss. This extends beyond Christmas. Imagine for example housing support for the poor, as it is common in the UK. Why give a housing subsidy? Wouldn't the poor be better off with a general subsidy?

Note also that gift buying typically happens in period where buying frenzy is encouraged by stores and media, at least in the United States. I can understand that it becomes difficult for some people to exercise restraint. Such unbridled consumerism can only add to the dead weight loss.

Media often comment how important good fourth quarter shopping results are for the economy. Well, the media is most likely wrong. I would prefer to have smaller seasonal effects and a better allocation of resources.

Car pollution: the wrong way, but in the right direction

The US Congress approved stricter standards for fuel efficiency in cars, the so-called CAFE standards, and President Bush signed this law. The European Union is also working towards stricter requirements. So there seems to be broad agreement that cars should become more efficient. But is this the best way to reach this goal?

Mandated higher fuel efficiency standards have one main consequence: the cost of cars should increase. In economic terms and for households, this means the fix cost of owning a car increases. As cars are more efficient, the marginal cost of driving then decreases: same cost of gas, more mileage out of a gallon. Thus, conditional on owning a car, people will be driving more. But will there be fewer cars on the road? Allow me to doubt that in the US, where it seems to be a God-given right and duty to own a car. And if a multi-car family decides to downsize, the remaining car(s) will be driven more. Things may be a bit different in Europe, where car loans are not as widespread to pay for the fix cost and alternatives to driving are well developed, even in rural areas.

All in all, I seriously doubt that this will reduce pollution and I am sure this will increase traffic. Just what we need. So what is the (better) solution? You guessed it, tax gas. This increases the marginal cost of driving, internalizes the relevant externalities, increases, whether you like it or not, the revenue of governments, and pushes manufacturers to provide more fuel efficient vehicles as they are demanded by drivers. No need for complex regulation and coercion to achieve those higher standards. All the incentives are right.

Impact factors are a fraud

The RePEc blog has a piece that should be an eye opener to everyone relying on impact factors to establish the quality of a journal. The publisher of these impact factors, Thomson Scientific, is unable to provide the data to replicate them! Using the standards of the journals Thomson Scientific is trying to measure, this would be considered fraud and obviously unpublishable.

I find this very unsettling, considering that so much in terms of tenure and promotion decisions in the academic world is relying on this. Imagine the consequences this could have in terms of litigation by those denied tenure... or by universities that were potentially misled.

I have been using these impact factors to decide where to send my manuscripts. I will not use them anymore and rather use the ones that RePEc computes. While they are clearly not comprehensive (but Thomson Scientific's are not either, and probably worse), at least they are openly computed. It looks like all the data is there on the web to replicate, there is just too much of it... but I have been able to replicate my own citation counts.

Congestion Charge, the London Experience

Now that it seems Mayor Bloomberg is getting really serious with the Manhattan congestion charge, to be about US$8 for every incoming vehicle, it is opportune to assess the London experiment. The following lines are largely based on a piece by Jonathan Leape, published in the Journal of Economic Perspectives, a peer-refereed publication of the American Economic Association, unfortunately not available online for recent publication years.

The premise in London was a desperate situation with an inescapable gridlock in the central district: day-time average speed was 14.3 km/h compared to 32 km/h at night, public transportation and congestion were viewed by Londoners as more important problems than crime. Charging for entering Central London had been discussed for a long time but was thought impossible to implement. The 2000 election of Ken Livingstone to Mayor changed this. Within three years, an impressive system of cameras that recognize license plates was in place and a £5 daily charge was implemented in February 2003, increased to £8 in July 2005. Within a year, day-time average speed increased to 16.7 km/h, the traffic of cars decreased by 34%, trucks 7% and vans 5%, however, taxi traffic went up 22%, and 6% for motorcycles. Other measured of congestion also showed significant relief.

In view of this success, and the welcome net revenue it brings to London, many other cities in Europe as well as New York City are considering a similar congestion charge. One should keep in mind, however, that not everything is rosy in London, though. Circumstantial evidence shows that traffic has increased close to the tariffed zone, presumably from cars driving around it or looking for parking. Also, it appears that cars that have bought a daily pass tend to take more advantage of it than before. Finally, an increasing number of vehicles that are exempt from the charge undermines its impact.

Again and again, it has been shown that congestion cannot be solved by building roads, as the latter just encourage more cars to use them. Besides, this was not an option in London. But incentives can work, making people pay makes them take notice. The availability of a good public transportation system is a requirement, to serve as an alternative to private transportation, and the ability of having a well-defined tariff area is a plus. All criteria apply to London, except maybe the tariff area: it is well-defined by a ring road, but the neighborhoods just outside clearly suffered.

In the case of New York City, the congestion charge has all but one reason to work well: Manhattan is very well serviced by public transportation, it is a well-delimited island that should not lead to a negative externality on neighboring boroughs and towns. But will car drivers take notice? I am not sure about this, considering the number of them who are willing to spend that much time caught in traffic every day while public transportation is available. At the going wage in Manhattan, the opportunity cost of their lost time is much higher than $8, and they seem to think sitting in gridlock is worth it. And looking at their car, $8 a day will not hurt them. But even if it does not reduce congestion, it will bring revenue from the city from those using Manhattan but living outside.

And I do not want to hear about those that do not live close to public transportation and need to work in Manhattan. They chose to live where they live. It is less expensive there for a reason. Take housing closer to rail/metro/bus/boat/work, sell the car, and they will be better off despite higher rent or house costs.

Update (January 24, 2008): This post has been translated to Italian on InterBlog.

Gas taxes are much too low

So gas prices went up again, and the press relays complaints about how it is the taxes that keep prices high. These voices ask that tax be reduced to bring relief to hard working Americans. How wrong they are.

Gas is taxed for three reasons: 1) because it is easy revenue: the tax needs to be levied at only few resellers; 2) because it penalizes adverse behavior in the sense that using gas pollutes (it exerts a negative externality on others); 3) the tax is a proxy for paying the use of a public good: roads.

Let me be more specific.

Whenever you tax, there is going to be some dead weight. Setting up the appropriate administrative structure, collecting the taxes and chasing evaders all imply costs. Compared to income tax or sales tax, the gas tax is incredibly efficient, as you can levy the tax at the level of the refineries.

Whether you believe in global climate change or not, everyone will agree that using gas will exert some externality on others. That can be pollution, but also contributing to congestion on roads. The idea is to make the user pay for the externality so that he changes his behavior to factor in this externality. As demand for gas is quite inelastic (reacts little to price changes), this can be quite substantial.

Gas use can also be a proxy for the use of some public goods. Driving on public roads is the perfect example, but think also about the cost of diplomacy/foreign aid/wars to secure oil imports. Someone has to pay for all this, and the best is to make the user pay. Road use would be best paid according to some monitoring of mileage, but gas use is the best proxy we have. In this regard, road use in the United States is currently subsidized, as the gas tax does not cover all of the costs of road construction and maintenance.

You may criticize the high-tax ways of Europe, but here the latter is dead right: with taxes at $5-6 a gallon, they are about right in pricing the externalities. In the US, externalities may be lower, as there is less density and thus congestion, and more land to absorb pollution. A $3 tax per gallon should entirely reasonable. It can be introduced gradually, say 5 cents a month over a five year period. And do not tell me the voters are against such tax increases, they actually favor it (pdf), as long as the revenue displaces some other tax like the income tax. This makes perfect sense, as a gas tax discourages a bad, while income tax discourages a good.

Doping: to regulate or not to regulate?

Doping is once more in the news, this time baseball is thrown into disrepute. And once more, discussions whether it is worth regulating doping sprout everywhere. Also here.

The goal of doping is to gain an advantage through means that are deemed unnatural. Thus high altitude training is legitimate, ingesting a stimulant is not, optimizing in a wind tunnel is legitimate, taking a coffee is not. Obviously, drawing the line between what is tolerated and not is not obvious, and the Olympic movement has set a certain standard for its sports that may not apply in others.

For example: Olympics are to determine who the best athletes are. The roots are in amateurism, whereby athletes are to compete for the love of their sport and set examples to others, encouraging them to engage in physical activity. I would like to argue that baseball, like some other US sports, has a entertainment as the main purpose. Witness for example that the field is purposely rigged to provide for a more level field, and thus entertainment, through such means as entry drafts, salary caps, and other behavior typical of a cartel.

Does doping thus provide for a better entertainment? If yes, and if entertainment is the main goal of that sport, and if players factor in the detrimental effect of doping on their health, then doping should be A-OK. But can players truly internalize the health effect of doping in an environment where there are limits to competition (in the economic sense)? In most US professional sports, there are limitations to how much players are paid, how and when they can move to a different team. This reeks like rent grabbing by team owners and/or sports leagues. It is highly unlikely players face a fair game in terms of doping, and not just doping.

In "amateur" sports, or call them Olympic sports, there are generally much fewer limitations on what sportsmen can and cannot do, except for doping. Of course, there are exceptions. But sportsmen should have the liberty of weighing pro and con of doping, much like they do when determining a training regimen, which team to join, or whether to go competitive or not.

So, my take at doping is: it should be allowed in most sports, except in the cartellized ones, like the professional sports in the US. But the true issue should be: why keep these cartels?

Flat tax in action

The Swiss canton (state) of Obwalden has just adopted a flat tax of 1.8% on all personal income, with a deductible of SFr 10,000. What is quite remarkable is not only that this tax rate is extremely low, but also that this tax law was accepted by popular referendum with a 90% majority.

It is not the first time that this canton has had innovative strategies in tax law, with the blessing of the voting population. In 2005, 86% accepted a regressive tax rate. Yes you read right. This tax law was later struck down by the Swiss Federal Court on the grounds that it was anti-constitutional.

Why would such a large proportion of the population be approving a tax regime that, usually, favors the rich? The strategy here is for this small state (population 33,000 in a country of 7 million) to attract the rich from other cantons, or abroad, thus increasing the tax base and making it possible to reduce the tax rate for all.

This is tax competition as its best. But does it really serve the common good, common being defined beyond the borders of Obwalden? At a larger scale, Switzerland has been repeatedly accused of unfair tax competition by the European Union because of the infinite latitude cantons have in designing income taxes. In particular, many cantons have set piecemeal tax agreements with foreigners who take fiscal residence and pay ridiculously low taxes. Imagine if everyone would do that: tax rates would be set so low that it would become impossible for the government to provide significant services. Or would it?

Clearly the issue here is that the tax jurisdiction is very small, atomistic, in that it does not by itself affect the overall tax base. A larger jurisdiction would be more careful in reducing its tax rate, as it does reduce its revenue. So, to prevent excessive tax competition, tax jurisdictions would need to form a cartel, and make sure no one deviates. This not going to happen in Switzerland, where cantons enjoy large liberties from the federal state. But a central state like France can impose significant tax rates on its citizens, as long as they cannot escape to Switzerland or Monaco (which suffered a blockade on this issue).

The first post

This is my first try at a blog, so we will see how it will get. The purpose of this blog is to discuss various events from an economic perspective. There are already plenty of blogs doing this, but I hope my own grain of salt will add something to the discourse. Postings may or may not be daily, we'll see.

As the title indicates, I want to priviledge the use of economic logic when discussing issues. I welcome challenges to this logic, or to my reasoning. Comments are for now open to everyone, this may change depending on use/abuse.